Dollar Consolidating Yesterday’s Losses

Stock Market Abstract - World Economy

  • The US dollar is consolidating yesterday’s losses that spurred speculation that the US was abandoning the more than 20-year old strong dollar policy
  • The US has a full calendar today that could encourage investors to focus again on the underlying economy rather than political rhetoric
  • The FOMC statement is unlikely to contain any surprises
  • Korea December IP and January trade came in stronger than expected; Thailand January CPI rose 1.55% y/y vs. 1.5% consensus

The dollar is mixed against the majors. Sterling and the Scandies are outperforming, while the Kiwi and yen are underperforming. EM currencies are mixed too. INR and MXN are outperforming, while RON and RUB are underperforming. MSCI Asia Pacific was up 0.2%, with the Nikkei rising 0.6%. MSCI EM is up 0.5%, with China markets closed until February 6 for the Lunar New Year holiday. Euro Stoxx 600 is up 1% near midday, while S&P futures are pointing to a flat open. The 10-year UST yield is up 2 bp at 2.47%. Commodity prices are mixed, with oil up 0.4%, copper down 0.6%, and gold flat.

The US dollar is consolidating yesterday’s losses that spurred speculation that the US was abandoning the more than 20-year old strong dollar policy. The meaning of that policy was clear to global investors even if it was often parodied. It was first articulated in the aftermath of a series of attempts by Republicans and Democrats to use the dollar as a cudgel to beat concessions out of its trading partners, especially Germany and Japan. When Rubin become Treasury Secretary in 1995, he distanced himself and the Clinton Administration from such attempts. No longer would the US use the dollar in such a way. And with a limited number of exceptions, this has remained the case.

The new US Administration is unconventional, to say the least. Many investors recognize the conflicting impulses. On one hand, the domestic agenda of tax cuts, deregulation, and infrastructure investment is seen as dollar positive. On the other hand, the desire to unwind the direct investment strategy and the international supply chains in favor of the more traditional export orientation is seen as negative for the currency, as befits mercantilism.

At the same time, rhetoric may have a short half-life if it becomes routine and not backed by near-term policy. The Mexican peso may be a good example. The Trump Administration’s thrust weakened the peso dramatically, and yet over the past two weeks, a period which included a spat over “the wall” that led to the canceling of a meeting between the two Presidents, the peso has been the strongest currency in the world.

With German officials opposed to the ECB’s unorthodox monetary policy, and even now pressing it to reconsider, the Trump Administration will find it difficult to convincingly attribute the depreciation of the euro over the last couple of years to Berlin and Frankfurt. Ultimately, the German steel has been mixed with softer alloys in making the euro. Although Germany could not hold a referendum on EMU, it seems clear that most Germans wanted to keep the Deutsche mark. It was sacrificed as a condition for the unification of Germany. The US has long encouraged a strong, integrated Europe.

The euro frayed the 100-day moving average and approached the 50% retracement of its losses since the US election. The $1.0820 may be another inflection point. A move above there could spur another round of short-covering that lifts the single currency into the $1.0875-$1.0935 area. On the other hand, a break of below $1.0740 could neutralize the technical tone.

The dollar broke out of the JPY112.60-JPY115.60 range during the North American session but closed in it. The JPY112.00 area, that held yesterday, is the 38.2% retracement objective of the dollar’s gains since the election. The greenback has recovered to almost JPY113.65 today. Initial resistance is seen near JPY114.00.

Sterling is the strongest major currency against the dollar today, gaining about 0.3% to a little above $1.26. It bottomed yesterday near $1.24. Last week’s high was near $1.2675. The market is expecting a more upbeat though neutral BOE tomorrow. The intraday technicals warn that a move much beyond last week’s high may be difficult, if such an advance materializes, there is scope for as much as another cent.

The US has a full calendar today that could encourage investors to focus again on the underlying economy rather than political rhetoric. The US reports the January manufacturing ISM and auto sales, but the main features are the ADP jobs estimate and the FOMC meeting. While there is not always a good fit month-to-month between the ADP and the non-farm payrolls, the general trend tracks fairly well, which is no coincidence. It is designed to do so, and is adjusted periodically to ensure it.

The Bloomberg median is for a 168k increase in private sector employment after 153k in December. The news wire survey found a median expectation for a 179k increase in private sector employment in December after 144k increase in December. The PMI is expected to be solid, while auto sales are expected to slow sequentially but remain at historically high levels.

The FOMC statement is unlikely to contain any surprises. Its economic assessment may be adjusted slightly to reflect the recent data. Market-based measures of inflation expectations such as the breakevens have moved higher, but remain modest (~2% for the five and 10-year breakevens). The economy is proceeding as officials expected. Specifics about fiscal policy are still not known, but this is unlikely to be featured in the FOMC statement. At the same time, the statement will offer no clues into the next meeting in the middle of March, which coincides with around when the debt ceiling is expected to be reached.

Earlier today, China, EMU and the UK reported January PMI figures. China’s official manufacturing PMI slipped to 51.3 from 51.4 in December. Some expected a larger pullback. The non-manufacturing PMI edged higher to 54.6 from 54.5. Caixin reports its manufacturing PMI Friday, which is expected to tick lower to 51.8 vs. 51.9 in December. Press reports that the PBOC asked banks to limit loan activity in Q1 is negative for the economic outlook. If the reports are true, we would expect the economic numbers to soften a bit going forward.

The eurozone manufacturing PMI increased to 55.2 from 55.1 in the flash estimate and 54.9 in December. In Q4 it averaged 54.0. The 2016 average was 52.5 compared with 52.2 in 2015. The improvement is due to France and Spain. France’s PMI ticked up to 53.6 from 53.4 in the flash. Spain’s came in at 55.6, up from 55.3. Many expected it to slip to 55.0. Germany’s 56.5 flash was trimmed to 56.4. It was 55.6 in December. Italy was an outright disappointment. Its manufacturing PMI slipped to 53.0 from 53.2. It had been expected to firm. The UK’s manufacturing PMI eased to 55.9 from 56.1, as expected.

Korea December IP and January trade came in stronger than expected. IP rose 4.3% y/y vs. an upwardly revised 5.3% in November, while exports and imports rose 11.2% y/y and 18.6% y/y, respectively. January CPI will be reported Thursday, which is expected to rise 1.5% y/y vs. 1.3% in December. If so, this would be the highest since and closer to the 2% target. Given this backdrop, the BOK is likely to retain a hawkish bias and start hiking in 2017. Next policy meeting is February 23, no change is expected then.

Thailand January CPI rose 1.55% y/y vs. 1.5% consensus and 1.1% in December. This was the highest rate since September 2014 and moves further within the 1-4% target range. Rising price pressures should keep the BOT in hawkish mode this year, though no move is expected at the next policy meeting February 8.